2018 (11) TMI 1426 - AT - Income Tax

Exemption claimed by the assessee u/s.11 - educational institution - AO observed that - assessee is collecting amounts in excess of the prescribed fees from students - Capitation fee accepted in the garb of donation was claimed as corpus donations - Donations were increasing on an year to year basis and corresponding increase in corpus fund - A large number of parents had confirmed that donations paid by them were nothing but capitation fee - Surplus generated by the assessee - price for selling education Held that - donations received by the assessee from the parents of the students could not be considered as Capitation fee and the surplus income could not be assessed under the head income from profits and gains of business . Land development expenditure incurred in cash at Chennai and Vellore centers - whether can be considered as not properly vouched and if so, whether it can be construed as funds diverted for use of trustees or specified persons indirectly benefiting them, thereby attracting Section 11(1)(c)? - Held that - CIT (Appeals) correctly understood the nature of expenses and its quantum after comparing the per acre rate at different places. Nevertheless, he fell in error in sustaining a disallowance to the extent of 10%. CIT(A) did not give any specific reason for sustaining a disallowance to the extent of 10% of the claim. More so since CIT (Appeals) himself had given a finding that per acre land development expenditure incurred in Chennai and Vellore were lower than what was incurred in Bangalore, where admittedly the payments were effected through bank. There is also no case for the Revenue that the land in question was not developed and was not an agricultural in nature when the assessee acquired it - disallowance of any land development expenditure was not warranted. Ex-consequenti there can be no question of any benefit accruing to the trustees or specified persons for applying Section 13(1)(c). Refund of advance fees / tuition fees to students/parents - whether it be construed as funds diverted for the benefit of trustees/ specified persons, thereby attracting Section 13(1)(c)? - Held that - It is not a case where no evidence was there to prove the refunds. AO had simply refused to believe the evidence filed by the assessee, considering the refunds to been effected in cash. We find much strength in the argument of AR, that if the assessee wanted to siphon off the funds, it need not have received the donations through demand drafts but could have opted to receive it in cash and diverted at source. Considering the preponderance of probability, is in favour of the assessee that the refunds were actually effected. The question of any benefit arising to the trustees or specified persons will not arise, once the payments are accepted as accounted correctly. Acquisition of 22.34 acres of land at Brahmapuram, Katpadi from Smt. B. Ramani for which agreed consideration was ₹ 1,00,00,000/- gave rise to a presumption that the difference amount was coming out of trust funds, resulting in a benefit to Smt. B. Ramani which fell within the meaning of specified person thereby attracting Section 13(1)(c) - Held that - There can be an advantage to the seller only if he gains something more than its value. Such a benefit can arise to a trustee only if the transactions by him/her entered with the trust, was with the intention to get an advantage and such advantage was not commensurate with the value of the property transferred. Just because a transaction is entered between a trust and trustee, we cannot say that it resulted in a benefit to the trustee. We are therefore of the opinion that CIT(Appeals) was justified in taking a view that there was no violation of Section 13(1)(c) on the above transaction. Advance payment to Smt. B. Ramani for acquiring 6.23 acres of land at Kangaeyanallur, which was later cancelled and refunded resulted in any benefit to Smt. B. Ramani attracting Section 13(1) (c) - Held that - Assessee trust had paid a sum of ₹ 22,34,000/- to Smt. B.Ramani through cheque dated 03.06.2004 and the amount was returned by Smt. B. Ramani on 20.9.2004, on cancellation of the proposal. Hence the period for which Smt. B.Ramani had the money with her was 3.6.2004 to 20.09.2004. Intention of the trust to acquire the property from Smt. B.Ramani is clear in that the agreement was registered. There is no case for the Revenue that agreed price of ₹ 52,46,570/- was more than the fair market price. Just because the sale did not go through and the amount was returned by Smt.B. Ramani would not be sufficient to hold that she benefited from such transaction. The intention in entering the transaction was not to benefit Smt. B. Ramani, but for acquiring the property for the assessee trust. We cannot say that Section 13(1)(c) stood attracted. We are of the opinion that CIT (Appeals) was justified in taking a view that there was no violation of Section 13(1)(c) on this transaction as well. Advance paid to Shri. Arjunlal Sunderdoss during previous year relevant to assessment year 2006-07 and ₹ 50,00,000/- paid during previous year relevant to assessment year 2007-08, were diversion of income/property of the trust attracting Section 13(1)(c) - Held that - Case of the AO is that no security was given for such advances nor any interest received from Shri. Arjunlal Sunderdoss. As against this, case of the assessee is that money was intended for developing a property owned by Shri. Arjunlal Sunderdoss, which was to be used by the assessee for its activities. Thus, we cannot say that the advances were given for no reason. In any case, Shri. Arjunlal Sunderdoss is neither a trustees nor a specified person coming within the meaning of Section 13(3). CIT (Appeals) was justified in taking a view that Section 13(1) (c) of the Act could not be invoked here. Acquisition of a property by daughter-in-law of Managing Trustee - application for loan indicating the value of the property meant that assessee had advanced the difference sum through Shri. Prakash, Finance Officer to Smt. S. Preetha, attracting Section 13(1)(c) - Held that - There is nothing on record to link the acquisition made by Smt. Preetha with the assessee. Just because Finance Office, of the assessee Shri. Prakash had drawn imprest money from the trust would not mean that such money reached the hands of Smt. Preetha. Especially so, when no such admission was made by Shr. Prakash in any of the statements recorded from him. We therefore find no reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals) in this regard. Payment for a property at Chamiers Road, Chennai, which was acquired by GIE in which partners were trustees of the assessee trust, resulted in a benefit to a specified person coming within the purview of Section 13(1)(c) - Held that - Section 13(1)(c) is attracted only where any income or property of the trust is directly or indirectly used for the benefit of a specified person. Assessee has also mentioned before the ld. CIT(A) that atleast ₹ 22 Crores given by the assessee were out of loans raised on the security of fixed deposits and mortgages and this had not been rebutted by the ld. DR. Loan is a liability and cannot be considered as a property or income of the assessee. It is also not disputed that interest on the loans taken by the assessee for providing the funds were paid by GIE. CIT (Appeals) has also given a finding that GIE had suffered a loss on sale of Chambiers Road property and they had derived no benefit. This finding was not rebutted by the ld. Departmental Representative. Thus we cannot say that the payments were made by the assessee with any intention of benefitting its trustees or the firm M/s. GIE, nor can we say that they benefitted from it. We thus do not find any reason to interfere with the order of the CIT (Appeals) on this issue. Using money of trust acquire the property - Held that - Sum paid to Shri. Sampath, one of the trustees for acquiring a property at 56 & 56A, Thirumalai Pillai Road, Chennai which was later returned by the said Shri. Sampath, when the acquisition did not go through, resulted in any benefit to Shri. Sampath, coming within the purview of Section 13(1) (c) - Held that - Argument of AR that this acquisition was planned as an alternative to the proposal for acquiring the Chamiers Road property which fell through due to defects in title, carries much strength. The question of benefit arising to a trustee or specified person would arise only if the transactions were entered with the intention of benefiting such person. Flow of events clearly indicate that Shri. Sampath had not benefited himself, by using the money of the trust. His intention was only to acquire the property for the trust. Just because the transaction did not go through, would not mean that Shri. Sampath, had directly or indirectly benefited from it. We are therefore of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in holding that there was no violation of the nature mentioned in Section 13(1)(c) We are alive to the fact that in the statements recorded during the search, trustee /related parties had admitted personal income aggregating to 7.87 crores. However, at no point did they say that this was part of trust funds. Shri. Sampath and his wife who had admitted G5.69 crore out of 17.87 crores, were admittedly having their own business and independent source of income. That apart aggregate of funds alleged to have been diverted came to 98.66 crores and what were admitted as personal income by trustees/relatives were only G7.87 crores. Revenue was unable to bring on record any unexplained investments or asset held by the trustees and their relatives, which could reflect such diversion of income. Thus the onus which was on the Revenue to show diversion of income or property of the trust for the benefit of trustees or specified persons was not discharged. Validity of notice issued u/s.153A - sustenance of disallowance to the extent of 10% of land development expenditure - Held that - Initiation of proceedings under section 153A of the Act by the learned Assessing Officer is in accordance with law because from the search proceedings various materials revealed that there is a possibility of the assessee having undisclosed / concealed income due to furnishing of incorrect particulars. Therefore, as pointed out by the learned Departmental Representative and the decisions relied upon by him, we find that issuance of notice under section 153A in the case of the assessee is valid in law for all the three assessment years. Estimation of land development expenditure - Held that - There was no reason for disallowing any part of such expenditure. For the reasons stated therein, we delete the disallowance of land development expenditure. TDS credit - Held that - Assessee is also aggrieved on credit being not given for the tax deducted at source. We direct the ld. Assessing Officer to verify the claim of the assessee and give credit, if due.

Summary

Issues Involved:
1. Exemption claimed under Section 11 of the Income Tax Act, 1961.
2. Whether donations received by the assessee from students/parents were capitation fees and if so, whether such receipts rendered the assessee ineligible for claiming exemption under Section 11 and 12 of the Act.
3. Whether the land development expenditure incurred in cash at Chennai and Vellore centers was properly vouched and if not, whether it could be construed as funds diverted for the use of trustees or specified persons, indirectly benefiting them, thereby attracting Section 13(1)(c) of the Act.
4. Whether refund of advance fees/tuition fees to students/parents were properly evidenced, and if not, whether it could be construed as funds diverted for the benefit of trustees/specified persons, thereby attracting Section 13(1)(c) of the Act.
5. Whether acquisition of 22.34 acres of land at Brahmapuram, Katpadi from Smt. B. Ramani for ?33,51,000/- for which agreed consideration was ?1,00,00,000/- gave rise to a presumption that the difference amount was coming out of trust funds, resulting in a benefit to Smt. B. Ramani thereby attracting Section 13(1)(c) of the Act.
6. Whether advance payment of ?22,34,000/- to Smt. B. Ramani for acquiring 6.23 acres of land at Kangaeyanallur, though later canceled and refunded, resulted in a benefit to Smt. B. Ramani attracting Section 13(1)(c) of the Act.
7. Whether advance of ?1,00,00,000/- paid to Shri. Arjunlal Sunderdoss during the previous year relevant to assessment year 2006-07 and ?50,00,000/- during the previous year relevant to assessment year 2007-08 were diversion of income/property of the trust attracting Section 13(1)(c) of the Act.
8. Whether acquisition of property at No.85, Second East Main Road, Gandhi Nagar, Katpadi, Vellore by Smt. S. Preetha, daughter-in-law of Managing Trustee, for a sum of ?40,00,000/- in which there was an application for loan showing its value as ?1,25,00,000/- indicated that the trust had advanced the difference amount through Shri. Prakash, Finance Officer, for facilitating such purchase, attracting Section 13(1)(c) of the Act.
9. Whether payment of ?34,77,50,000/- for acquiring property at Chamiers Road, Chennai, which was finally acquired by a firm called M/s.GIE, in which the partners were the trustees, resulted in a benefit coming within the purview of Section 13(1)(c) of the Act.
10. Whether the sum of ?1,00,00,000/- paid to Shri. Sampath for acquiring a property at 56 & 56A, Thirumalai Pillai Road, Chennai, which was later returned by Shri. Sampath when the acquisition did not go through, resulted in a benefit to Shri. Sampath coming within the purview of Section 13(1)(c) of the Act.
11. Whether the notice issued under Section 153A of the Act was valid.
12. Whether the change in the method of accounting from cash to mercantile was justified.

Detailed Analysis:

1. Exemption Claimed Under Section 11:
The Tribunal upheld the assessee's claim for exemption under Section 11, rejecting the Revenue's argument that the surplus income generated by the trust rendered it ineligible for exemption. The Tribunal relied on its earlier decision in the assessee's case for assessment years 2002-03 to 2004-05, where it was held that donations received could not be considered capitation fees and that the surplus income did not indicate profiteering.

2. Donations as Capitation Fees:
The Tribunal found that the donations received by the assessee from students/parents were not capitation fees. It noted that the fees charged were regulated by AICTE/DOTE, and the surplus generated was incidental to the educational activities. The Tribunal followed its earlier decision, which had been upheld by the High Court, and held that the donations were voluntary and not coerced.

3. Land Development Expenditure:
The Tribunal found that the land development expenditure incurred in cash at Chennai and Vellore centers was properly vouched. It noted that the expenditure was incurred for genuine land development work and that the vouchers were available at the time of search. The Tribunal rejected the Revenue's argument that the expenditure was excessive and held that there was no diversion of funds for the benefit of trustees or specified persons.

4. Refund of Advance Fees/Tuition Fees:
The Tribunal accepted the assessee's explanation that the refunds of advance fees and tuition fees were genuine. It noted that the refunds were made in cash due to practical reasons and that affidavits from parents confirming the refunds were filed during the remand proceedings. The Tribunal held that there was no evidence of diversion of funds for the benefit of trustees or specified persons.

5. Acquisition of Land from Smt. B. Ramani:
The Tribunal found that the acquisition of 22.34 acres of land from Smt. B. Ramani for ?33,51,000/- did not result in any benefit to her. It noted that the amount paid was the guideline value and that there was no evidence of any additional payment. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

6. Advance Payment to Smt. B. Ramani:
The Tribunal found that the advance payment of ?22,34,000/- to Smt. B. Ramani for acquiring 6.23 acres of land, which was later canceled and refunded, did not result in any benefit to her. It noted that the transactions were supported by registered agreements and that the amount was refunded through a cheque. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

7. Advance to Shri. Arjunlal Sunderdoss:
The Tribunal found that the advance of ?1,00,00,000/- paid to Shri. Arjunlal Sunderdoss during the previous year relevant to assessment year 2006-07 and ?50,00,000/- during the previous year relevant to assessment year 2007-08 did not result in any benefit to him. It noted that the amount was returned within a short period and that there was no evidence of any benefit accruing to the trustees or specified persons. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

8. Acquisition of Property by Smt. S. Preetha:
The Tribunal found that the acquisition of property at No.85, Second East Main Road, Gandhi Nagar, Katpadi, Vellore by Smt. S. Preetha for ?40,00,000/- did not result in any benefit to her from the trust. It noted that there was no evidence linking the payments made by her for the property with the imprest money drawn by the Finance Officer from the trust. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

9. Payment for Property at Chamiers Road:
The Tribunal found that the payment of ?34,77,50,000/- for acquiring property at Chamiers Road, Chennai, which was finally acquired by M/s.GIE, did not result in any benefit to the trustees. It noted that the payments were made from the trust's bank account directly to the vendors and that the property was intended for the trust. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

10. Payment to Shri. Sampath:
The Tribunal found that the sum of ?1,00,00,000/- paid to Shri. Sampath for acquiring a property at 56 & 56A, Thirumalai Pillai Road, Chennai, which was later returned by him, did not result in any benefit to him. It noted that the payment was made for acquiring the property for the trust and that the amount was returned when the acquisition did not go through. The Tribunal held that there was no violation of Section 13(1)(c) of the Act.

11. Validity of Notice Under Section 153A:
The Tribunal upheld the validity of the notice issued under Section 153A of the Act, following its earlier decision in the assessee's case for assessment years 2002-03 to 2004-05, where it was held that the initiation of proceedings under Section 153A was in accordance with law.

12. Change in Method of Accounting:
The Tribunal found that the change in the method of accounting from cash to mercantile was justified. It noted that the change was bona fide and consistently followed thereafter. The Tribunal upheld the deletion of the addition made by the Assessing Officer for the change in the method of accounting.

Conclusion:
The Tribunal dismissed the appeals of the Revenue and partly allowed the appeals of the assessee. It upheld the assessee's claim for exemption under Section 11, rejected the Revenue's arguments on various grounds, and deleted the disallowance of land development expenditure. The Tribunal also directed the Assessing Officer to verify and give credit for the tax deducted at source, if due.